Namibia has every right to celebrate. It’s never produced a barrel, but now, its Kavango Basin test wells have hit hundreds of meters of oil. And the junior exploration company behind it all thinks it might be sitting on a potential mammoth conventional oil play.
On August 5th, Reconnaissance Energy Africa (TSXV:RECO, OTC:RECAF) and its partner, NAMCOR, Namibia’s state oil company, released their most stunning results yet—with lab tests comprehensively confirming an active petroleum system and results from a second test well hitting 350 meters of hydrocarbon showings.
That’s on top of the first test well’s showings of 250 meters of hydrocarbons.
This is a huge showing for this junior company’s maiden drills. In fact, it’s so huge that optimism is growing that they might have actually test-drilled right into a reservoir on the first shot. Referring to Jarvie’s graph below, in zone 2 where the oil saturation exceeds 100, they’ve drilled into a very thick zone of potential production or reservoir. “It’s the primary target for potential production testing.” If that doesn’t get investors excited I don’t know what will.
The first well (6-2) hit over 250 meters of hydrocarbon shows after drilling to a depth of 2,294 meters. The second test well returned 350 meters of hydrocarbon shows after drilling to a depth of 2,780 meters.
Sample logging data and analysis was conducted by Horizon Well Logging Inc, whose CEO, Doug Milham, described the play as “an exciting oil and gas exploration project with world-class potential”.
“The presence and quality of oil and gas shows encountered while drilling the 6-2 and 6-1 wells was remarkable, with many positive indicators of hydrocarbons encountered throughout both wells,” Milham said. “Our sample logging data and analysis has identified significant intervals of oil and natural gas in each of the two wells drilled, with varying characteristics from multiple zones.”
The results mean that RECO and NAMCOR have met all the drilling program requirements to extend the exploration period on this play.
Exploration now advances to the next phase, with an ambitious 450-kilometer 2D seismic acquisition already underway, contracted to world-class Polaris.
The first two wells and the Q4/21 drilling program will be the bases for mapping the entire 6.3-million-acre basin for recoverable commercial hydrocarbons and another 2.2 million acres in neighboring Botswana.
“The goal of the stratigraphic test well program, approved by the Namibian government, was to establish the presence of a working conventional hydrocarbon system in this new basin. The results we have achieved from these first two wells have significantly exceeded our expectations,” Recon Africa CEO Scot Evans said in a press release on August 5th.
RECO hasn’t just encountered significant oil and gas shows over multiple zones in their first two test well, but those showings are associated with zones of fracture and matrix porosity, which means that the 450-km 2D seismic program just got some very strong support and a huge boost of confidence in what comes next.
Africa’s Potential Middle East-Style Play
Previously, big names like Wood Mackenzie and world-class geochemist Daniel Jarvie had compared Kavango’s oil potential to the Texas Permian, with Jarvie estimating “conservatively” the basin could have generated billions of barrels of oil (after only considering 12% of RECO’s license area).
That was more than good enough for early-in investors who feel they’ve stumbled upon a once-in-a-lifetime thing.
And so far, indications continue to show positive signs. .
Some people think this could possibly be a Zagros Belt-style geology—the same geology that has created the world’s biggest oil producers in the Middle East.
“The immense productivity in Saudi Arabia, Iraq, and Iran (especially the Zagros belt) is based on multiple stacked source rocks and several carbonate reservoirs which are involved in many types of traps,” Jim Granath, RECO’s leading geologist, told us in July, right before the results of the second drill were released.
“This is not to say we have discovered a new Middle East, but some of those are in structures –the Zagros in particular in Iran and Iraq—that are similar to what we suspect we have drilled into. So, the Kavango rocks may have similar reservoir properties to some of those,” he said.
What Recon Africa (TSXV:RECO, OTC:RECAF) has found so far is what geologists dream of at this early stage in the exploration game:
The 6-2 well in Kawe, Namibia, was drilled to a final depth of 2,294 meters, encountering over 250 meters of conventional migrated light oil, natural gas and natural gas liquids.
Three hydrocarbon-bearing zones, fluid types, hydrocarbon migration, characteristics and potential for production testing are illustrated in this chart and with more information explaining the findings here.
The 6-2 well has been left in a state that allows it to be re-entered to run a Vertical Seismic Profile (VSP) and test potential zones of interest.
The data from this well, combined with the multi-zone potential significantly increases the chances that ReconAfrica has encountered a productive reservoir to be tested in its very first drill. Now, the VSP and the 2D data will further delineate potential structures in and around the well.
The 6-1 well in Mbambi, Namibia (only 16 kilometers from the first well), was drilled to a final depth of 2,780 meters, encountering 350 meters of oil and natural gas shows over 7 potential zones. RECO will still get more results from the logging data, cuttings and cores, which are now being prepared and shipped to the United States for further analysis.
The casing on this well was set to total depth.
The Final Verdict: Kavango Is Being De-Risked for Exploration
Recon Africa and NAMCOR have now significantly reduced a big part of the geologic risk in the Kavango Basin. This is an active petroleum system. And they’ve accomplished this in only 2 wells and they might have even found a reservoir with the first well. That’s a remarkable anomaly in the industry. Offshore Norway, it took 30 wells to get to the point that Kavango is already.
What we find astounding here is that the first two wells are similar in terms of the distribution of the oil and gas shows running up and down the stratigraphy. And according to RECO’s geologists, this is “decidedly a conventional play” because the hydrocarbons are in rocks into which they have migrated.
We think this is a huge leap forward for this junior explorer. The giant Kavango Basin has an active petroleum system proven by testing. And the ability to now move on to the next phase of exploration is the first big step in the potential success of this company.
So, what comes next on this path towards production?
ReconAfrica (TSXV:RECO, OTC:RECAF) and NAMCOR will now be using drilling and 2D seismic data to determine the planning and execution of future drilling locations.
We can also potentially expect production testing results from the 6-2 and 6-1 wells.
Future drilling locations will probably target potential hydrocarbon-bearing structures from the seismic program with the aim of achieving commercial levels of oil and gas production.
Once the seismic acquisition is complete, ReconAfrica is likely to drill one or two more wells this year, with an additional two to four wells in the first half of next year.
Most importantly for investors, the 2D seismic acquisition could facilitate a farm-out JV process for ReconAfrica, with the aim to significantly boost exploration and development of this giant, 8.5-million-acre play.
We think that no opportunity in the oil patch has come close to this in decades. And we doubt any opportunity like this is likely to surface again for some time—if ever. With geologic risk mostly eliminated, short-sellers could now find themselves in an impossible position of loss as early-in investors enjoy the victory of RECO’s success to date.
Other companies to watch:
Netherlands-based, Royal Dutch Shell Plc. (NYSE:RDS.A) operates as an integrated oil, gas and chemicals company. Shell remains one of Big Oil’s least optimistic companies when it comes to the long-term oil and gas outlook Shell says we might already be past peak oil demand and is bracing itself for a worst-case scenario: Demand to never fully recover.
“I think a crisis like this has the potential to capitalize society into a different way of thinking, much as the Paris Agreement has had,” company CEO Ben van Beurden has told investors.
Shell has also revealed that it expects ~75% of its proved oil and gas reserves to be exhausted by 2030 and nearly all by 2050.
It’s no stranger to Africa’s oil boom, either. The Dutch oil giant began drilling in the region over 70 years ago, and now has energy assets in over 20 countries across the continent. Though it has sold off a number of its prized plays in the region in recent years, it continues to maintain a strong presence, especially in South Africa.
South Africa is key for Shell because the government has been significantly more stable than some of the other big bets on the continent. Moreover, the country has been very open to Shell in its projects. The company’s operations in South Africa include retail and commercial fuel, lubricant, chemical and manufacturing. It’s also heavily invested in upstream exploration. It even holds the exploration rights to the Orange Basin Deep Water area, off the country’s west coast and has applications for shale gas exploration rights in the Karoo, in central South Africa.
Chevron (NYSE:CVX) is a leader in the industry and the second-largest oil company on the New York Stock Exchange. . It was founded in 1879 in California by John D. Rockefeller and partners as the Standard Oil Company of Ohio, which became part of the Standard Oil trust when it was dissolved on January 1, 1911. One year later, Chevron Corporation (then Texaco) bought out its former partner for $10 million ($2 billion today). The new corporation then changed its name to reflect this shift from being primarily an oil refining business to one also involved in natural gas exploration and production.
Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region. With bets on both oil and natural gas, the company is looking to take advantage of both fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner as prices climb back up to pre-pandemic levels.
BP Plc. (NYSE:BP) engages in the energy business worldwide, including oil and gas production and refinery, trade in natural gas; offers biofuels and operates onshore/ offshore wind power, and solar power generating facilities. Also known as British Petroleum, BP is a multinational energy company that has been around for over 100 years. BP was formed in 1909 by the merger of two rival companies- Anglo-Persian Oil Company and Royal Dutch Shell. With operations in more than 80 countries and regions, BP is one of the world’s largest oil and natural gas producers.
We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net-zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
TotalEnergies (NYSE:TTE) is one of the most diversified and forward thinking oil majors in the business. And it’s no stranger to the African oil game, either. Total betting big on the region’s potential. The company has been in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon.
Recently, Total said that it would accelerate its dividend growth “in the coming years” as it looks to return more cash to shareholders. The group will increase its “dividend by 5 to 6 percent per year instead of the 3 percent per year as previously announced,” Total said.
It’s also one of the most conscious companies in the business. Total checks every box in the ESG checklist. It is promoting diversity and safety, making massive changes in its operations to ensure that its business is environmentally sound, and has even committed to going carbon neutral by 2050 or sooner. It’s no surprise that shareholders are loving its forward-thinking approach.
Baker Hughes (NYSE:BKR) recently announced what it calls the largest deployment of its remote operations digital technology, and this deployment involved all of Aramco’s drilling operations. This is how the company describes what the project entails: “a single solution that covers data aggregation from the edge; real-time, unified data streaming and visualization; data management; software development services; rig-site digital engineers; and monitoring personnel.”
In other words, what we may call remote drilling in a conversation actually involves a comprehensive push to unify and centralize operations in the upstream industry. Baker Hughes has been doing it for 20 years already, and its peers are doing it, too. According to Jegatheeswaran, this is the future of the upstream. Because it’s beneficial for everyone involved.
ConocoPhillips (NYSE:COP), as the largest pure upstream company, has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders. Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet.
Thanks to a global recovery in demand, Conoco has seen an increasingly bullish look on the industry, and it was one of the few companies which did not partake in the mass-layoffs seen in the industry last year. In addition, Conoco has also seen a fairly decent about of insiders buying into its stock, which is a good sign.
As one of the biggest names in energy, Suncor Energy (NYSE:SU, TSX:SU) has adopted a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
Enbridge Inc.(NYSE:ENB, TSX:ENB), is a Canadian multinational energy company. Founded in 1949 by the World War II veterans Kenneth W. Dam and Arnold R. Parry, it has since grown to be one of North America’s largest pipeline companies with over 2 million miles of pipelines across Canada and the United States. They also provide services for gas transmission, natural gas storage, distribution as well as power generation and electricity retailing. They have more than 150 years combined experience in developing energy infrastructure that provides Canadians with affordable energy that they can rely on to heat their homes during long winter months or cool them down during hot summer days.
Enbridge is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. But that’s only if it can overcome some of the challenges in its path. Most specifically, its Line 3 project which has faced scrutiny from environmentalists.
Canadian Natural Resources (NYSE:CNQ, TSX:CNQ) is one of the biggest names in the Canadian energy sector with operations spanning across North America and Western Europe. The company has been around since 2010 but has had roots dating back to 1952 when Panarctic Oils was founded by Harold Lothrop, Kenneth Lothrop (Harold’s father), and two other partners.
Unlike many of its peers, Canadian Natural Resources kept its dividend intact after swinging to a loss for the first half of the year, while Canada’s producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Despite the negative stigma surrounding the the oil sands, the sector is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
Crescent Point Energy Corp. (TSX:CPG) was another Canadian oil producer that struggled in the oil price crisis of last year. Despite its struggles, however, Crescent has seen its share price climb significantly over the past month. The 28% gain may just be the beginning of a turnaround for the embroiled Canadian oil giant. In fact, it has even received a ‘strong buy’ signal from analysts at Zack’s thanks to its strong price performance and improving technical.
In addition to bullish news from OPEC and Asian demand recovery, Canada’s oil sands are looking a bit more positive as well. According to government data, the controversial oil sands hit record-production in November and will likely continue to grow throughout the year. This turnaround in Canadian oil will likely be a boon for Crescent, and a full recovery is looking evermore probable.
Matt Murphy, an analyst with energy research firm Tudor Pickering Holt explained, “There will be a bit of incremental growth in excess of this record,” adding, “Our model shows the oil sands getting to 3.3 million bpd by the middle of 2021.”
Inter Pipeline Ltd (TSX:IPL) is another pipeline company that holds plenty of upside for the coming year, IPL is particularly interesting for its exposure to the oil sands sector which is sure to see a boost in production as more and more companies focus on increasing output in the new high oil price environment.
The crisis in Venezuela has already seen heavy oil imports to North America drop, and as demand for the product increases and prices for oil continue to rise, companies in the space are sure to see growth.
TC Energy Corporation (TSX:TRP) is a major oil and energy company based in Calgary, Canada. The company owns and operates energy infrastructure throughout North America. TC Energy is one of the continent’s largest providers of gas storage and owns and has interests in approximately 11,800 megawatts of power generations. It’s also one of the continent’s most important pipeline operators. With TC Energy’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s highest valued energy companies.
One of TC Energy’s biggest struggles in recent years was grappling with the particularly difficult approval process for its Keystone Pipeline. But that’s all history now, and with the bounce back in oil and gas demand, TC Energy could stand to benefit.
MEG Energy Corp (TSX:MEG) is a Canada-based oil producer which operates primarily in Northern Alberta’s oil sands. The forward-thinking company uses steam-assisted gravity drainage to retrieve oil from the deep wells which it drills. The excess heat and electricity produced from this process is then sold to Alberta’s power grid.
The company’s large proven resources and their cutting-edge technology make MEG a promising company for investors looking to get in to the promising oil sands in Alberta.